Competition In Technology Is More Vibrant Than It Looks

Title

The clamor is rising for Big Tech firms to be broken up. With Amazon and Alphabet, Google's parent company, reporting record profits, voices from both the political left and the right have called for the firms to be broken up using antitrust law. Both sides claim these companies use data they collect from customers to keep themselves big and powerful.

At first glance, digital markets do seem fairly concentrated in just a few companies. Facebook owns the top three social media apps: Facebook, WhatsApp, and Messenger, all of which exceed 1 billion unique monthly active users. The company captures 20.9% of total U.S. digital ad revenue, putting it only behind Alphabet's 42.2%. And given the fast growth rate of Amazon, this looks like it is only a matter of time before the three control the entire market.

Apple's native iMessage service, which does not show up in social media download statistics, shows much higher user engagement than Facebook Messenger, especially among younger demographics. Facebook is actually competing in messaging with a company whose interface it depends upon to gain access — and Facebook is losing.

This reveals one of the difficulties in seeing who is competing against whom online. Facebook competes not only against other social media sites like Snap, but also against the likes of Google, Apple, and Microsoft in various domains. Online competition requires the firm to provide for a variety of user demands — or cede ground to rival startups. Unless a firm like Apple can provide a messaging service that its users enjoy, it would allow Facebook to gain ground, which weakens the long-term prospects of Apple's business.

These "platform wars" mean that competition between tech giants takes place over many different products and services, at various tiers. To understand the level of concentration properly, one cannot specify the market too narrowly. While Snapchat has less than one third of Instagram's users, those under the age of 25 use Snapchat much more heavily.

Taking a snapshot of one moment does not tell you about how demographics will affect market position in the next. The competition is fierce. Today's startups are tomorrow's giants, just like Facebook and Amazon once were — and not very long ago.

That means the current market positions of Big Tech firms are inherently unstable, despite the best efforts of these firms to prepare for the future. Facebook's attempt to kill off Snapchat with its Camera app is now regarded as a failure, as is Google's attempt to kill Facebook with Google Plus, and Amazon's attempt to branch into mobile with the Fire phone.

Having lots of data and users is not enough for these companies to branch out into new territories. If platforms fail to develop ecosystems that adapt to user demands, they can fall from seemingly dominant positions rapidly — as recent history amply demonstrates.

When the competitive pressure on these firms is put into perspective, they look less dominant. Amazon currently makes 2.5% of U.S. digital ad revenue compared to Alphabet and Facebook's near 70%, but looking at total U.S. ad revenue shows these firms together make only 20%.

Just consider that if tech giants are increasing their revenues to the detriment of newspapers, it still exaggerates the concentration to neglect newspapers' print ads entirely. It is also possible that some recent decisions, such as Facebook's news feed changes, will drive away users in the long-term. This is a dynamic market.

One thing, however, is perfectly clear. Consumers are by and large happy with their services. None of the Big 5 tech companies (Alphabet, Amazon, Microsoft, Apple, and Facebook) have below a 60% approval rating. The companies may be large, but competition among them is as fierce as ever, allowing them to consistently innovate and provide consumers with new and better services.

Breaking up big technology companies in an attempt to force "competition" (according to a model developed in the pre-tech, 20th Century economy), without a clear understanding of the current market dynamics and the impact on consumers themselves, would leave their users worse off. And these days, that means all of us.